How to Invest in a Market Crash

How to invest during the most pronounced market crash in history is not easy. Consider undervalued stocks such as the Bank of Montreal (TSX:BMO)(USA).

| More on:

It’s been a scary time for investors. The market crash of 2020 has been one of the most pronounced in history. For reference, a market crash is defined by a drop of 20% or more. No other crash in history has been as sharp and steep as this year’s crash, and investors might be wondering how to invest during such times of volatility. 

There’s no simple answer. Each individual investor has their own risk tolerance, is at different stages in life and has different needs, which is why there’s no “one strategy fits all” approach to investing. The approaches in today’s market will differ by individual. 

There are however, some principles that every investor can use to help guide their investment decisions. 

How to invest without emotion

The most important principle is not to let emotion dictate your investment strategy. You’ve heard it before: Retail investors typically underperform the market. If you dig a little deeper, you’ll find out that there is a simple reason for this: emotion. 

Retail investors underperform because they let emotion get in their way of investment decisions. This is particularly dangerous when fear takes hold. Many investors are experiencing their first market, and even those who lived through the Financial Crisis haven’t experienced anything quite like the current bear market

In such times, letting fear dictate your decision-making will likely lead investors to sell. Unfortunately, timing the market is not a winning strategy. Selling in a downturn is also not the best course of action.

You don’t make money selling at a loss. Similarly, it’s important to remember that most investors are sitting on a paper loss. The loss is only realized if you liquidate your position. 

Learning how to invest without emotion is not easy. Even the most experienced investors are currently finding this difficult. It is however, best done by trading on fundamentals. Don’t get sucked in to momentum investing, or the next shiny object. Let the numbers do the talking and in the long run, investors will end up on top.

Invest in high-quality companies

Now is not the time to load up on speculative, penny stocks. Many high-quality blue chip companies now trade at a discount. Putting your money in undervalued blue chip stocks is how to invest and take advantage of the current market downtrend. 

Case in point, the Bank of Montreal (TSX:BMO)(NYSE:BMO) is now trading at levels not witnessed since the financial crisis. It has lost approximately 33% of its value and is now trading at only 7.75 times earnings.

In fact, the company is trading at a 38% discount to historical averages. Like clockwork, the Bank of Montreal has always returned to trade in line with these averages. 

As a result of the downturn, the bank is now yielding close to a record high of 6.75%. Investors would receive $675 in annual income for every $10,000 invested. Generating this much cash from Canada’s Big Banks is rare. 

Dividends also help insulate the shock of capital losses. In the case of the Bank of Montreal, it owns the longest uninterrupted dividend streak in Canada. Having paid out a dividend for 191 consecutive years, the dividend is among the safest in the country. 

How to invest in a market crash is simple. First and foremost, investors need to remain calm and not let emotion rule the day. Second, park your money in discounted blue-chip stocks. It is one of the best ways to ride out the current volatility and will set an investor’s portfolio up for success. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Mat Litalien owns shares of BANK OF MONTREAL.

More on Dividend Stocks

woman retiree on computer
Dividend Stocks

Should You Buy Telus Stock at $20?

Down 40% from all-time highs, Telus is a beaten-down TSX dividend stock that trades at a discount to consensus price…

Read more »

top TSX stocks to buy
Dividend Stocks

Here’s Exactly How $15,000 in a TFSA Could Grow Into $200,000

Canadians with sizeable TFSA balances today have utilized the full potential of the investment vehicle.

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

The 1 Canadian Stock I’d Buy and Hold Forever in a TFSA

Don't get complicated. Consider this Canadian stock as a long-time buy.

Read more »

Man data analyze
Dividend Stocks

A Top-Performing U.S. Stock That Canadian Investors Really Should Own

This top US tech stock is something you cannot miss out on, and there’s another from Canada that you need…

Read more »

how to save money
Dividend Stocks

3 Premium TSX Dividend Stocks Worth Loading Up On

These three premium TSX dividend stocks remain among the best bets for long-term investors seeking stable total returns.

Read more »

Hand Protecting Senior Couple
Dividend Stocks

3 Canadian Dividend Stocks Perfect for Retirees

These three Canadian stocks are ideal for retirees.

Read more »

Middle aged man drinks coffee
Dividend Stocks

Should You Buy Goeasy Stock While It’s Below $170?

Goeasy stock still looks like a winner, so why is the stock price down below $170?

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Dividend Stocks

Maximizing Your TFSA: Smart Investment Moves for 2025

Stocks like Enbridge provide significant dividend income, which is ideal for tax-savings within your TFSA.

Read more »